Factors That Impact On Forex Rates

This article is about the factors that impact on forex rates and what you should be aware of.

The effect of changes in forex rates affects everyone in a country. Business corporations are affected by the cost of certain goods and services to their businesses and the effect of this on their profits. Individuals are affected by the cost of goods imported from other countries. All commodities are affected by the laws of supply and demand, and forex rates are no different. Consumer spending levels affect the supply and demand of money and this is often reflected in the strength or weakness of a country’s currency.

Forex traders constantly try to predict forex rates. To do this effectively, you have to be aware of the economic climate in the countries linked to your currency pairs. You need to be aware of the factors that have the most impact on the foreign exchange rates in those countries.

Trade Balance

A country’s trade balance is made up of the value of its exports minus the value of its imports. If this turns out to be a positive figure, the country will show a positive trade balance. If the figure is negative, the country shows a trade deficit.

The trade balance impacts directly on the supply and demand of a currency. If the country shows a trade surplus, the demand for the currency will increase as there will be a need for that currency to purchase goods from it. If the country displays a trade deficit, it implies that more of the country’s currency is leaving for them to settle their debts for the high import levels.

Employment

The employment levels in a country have a direct impact on the economic climate of the country. If the unemployment levels are on the rise, consumers tend to spend less as you cannot spend if you are not earning. The citizens of the country who are employed become nervous about the economic climate and slow down their spending. This pushes the economy into a slowdown and ultimately a downward slump. This decline in the economic productivity of the country will affect the country’s currency negatively. The global effect on the country is reduced confidence which means that foreign investment will slow down which affects the country’s currency in a negative way.

How does the Central Bank Affect Forex Rates?

There are several major economies that indicate low interest rates and this may remain the same for a while. This has pushed the central banks and governments to use measures that are not often implemented to allow them to intervene in the market. This is a measure that will influence the country’s economic growth. Central banks are now making use of quantitative easing ways to boost the money supply in their economy. This means they have to purchase government bonds from the larger financial institutions to provide the banking institutions with liquidity. This is normally a last resort method to boost the economy. The first port of call would be to lower the interest rates as a method of boosting the economy. These methods of boosting the economy could bounce back on the central bank. The increase of a country’s money supply could lead to the devaluation of the currency.